An archive of my writings on the Jamaican economy dating back to 2003 and link to my books "Charting Jamaica's Economic and Social development - A much needed paradigm shift" AND "Achieving Life's Equilibrium - balancing health, wealth, and happiness for optimal living"

Thursday, November 29, 2007

WYSIWYG (what you see is what you get) is a computer terminology that refers to the way in which a file is output in relation to how it is viewed on the monitor. As it says, what you see on the monitor is the way the file will be output. Before WYSIWYG technology the representation on the screen may have included references that would not be shown on the output.

I have based on this coined the acronym WYPIWIG, what you pay is what you get. And I think of this mostly in relation to the way we approach human resources in Jamaica. Sometimes when I see Butch Stewart, he proudly refers to the fact that his hotel workers are among the best trained in the world and attributes this large part to the success of his chain. In fact he will tell you that on occasions when he visits a hotel overseas he will see one or two former Sandals workers in management positions. His philosophy, hire good people and watch your business grow.

Recruitment processThis of course is one of the biggest problems in the public and private sector. Many hirers believe that the way to business success is spend as little money as possible on human resources, so that the greatest effort in hiring is to try to get someone with acceptable qualifications for the lowest cost. The result of course is that the “critical thinking” required to perform the job better than the competition, and driving the company to new levels of efficiency, is missing. They would much rather spend the money on internal training, fixing errors, or marketing than getting someone very capable who will prevent such expenses. Is there any question then as to why we have companies that find it difficult to compete internationally?

Some years ago a very senior manager said to me that the main advice he would have for someone is hire good people, irrespective of how long they stay with you, as the value they could add in a year far outweighs the value a mediocre person adds in five years. When that company was facing challenges (driven by global changes) it was the quality of the human resources there that turned it around and today it is one of the more successful companies.

In the USA for example great emphasis is placed on the recruitment process, from the right type of advertisement (for which they use many innovative means) to the selection process which is based more on assessing “critical thinking” rather than academic qualifications. They recognize that the human factor is the most important input in the output process and go to extreme measures to ensure that they recruit the right people, as that is where the success starts. In Jamaica of course there is not much creativity in advertising, as the objective is not about proper recruitment in many cases. In any event when the person is hired in many instances their ideas are not valued as some managers have an autocratic approach.

We talk about productivity improvement in Jamaica, but our public sector in many cases is not set up for increasing productivity. The bureaucratic nature of the rules governing public sector workers, the way they are compensated, and the autocratic way of some managers, in many instances prevents rather than promotes any critical thinking. So while we preach productivity every day we do everything within our structure to prevent the hiring of the best (in some instances) and where we have good people in place the way our public sector rules are organized is not conducive to increased productivity. Is it any wonder then that year after year we struggle with issues such as corruption, bureaucracy, and low productivity. It will never be enough to change one person at the top or buy a piece of equipment if we do not address the people factor.Objective of the MOUsAs an example, our objective in forming the Memorandum of Understanding (MOU) was to save money, not develop a productive base of people who can contribute more significantly to economic growth and by doing so increase their compensation levels. Our objective is first and foremost to save money, which the irony is unless you improve the people factor it will all blow up anyway. After six years of the MUO (MOU1 and MOU2) what have we achieved. We are even more strapped for cash, productivity has not improved, economic growth is stagnant, and the people have suffered as their real wages have declined. This again is another human resource factor of course, lack of vision by our leaders.

When we talk about our public sector bodies, and how much they lose, we fail to speak about the most important reason for this, the human resources. In many cases the main problem is the quality of the human resources that run some of these institutions. In some cases this is because they are political appointments and has not gone through a proper selection process but is based on who the person knows. As an example someone sent me an email requesting that I help them to get a job because they are currently not working and think that I should help, without saying that they will submit their resume. In other words just expecting the appointment to be made thus continuing a tradition of appointments without scrutiny. We can’t seem to make the link between this type of practice and our current economic dilemma.

And so because of our lack of failure to recognize the human element as an integral part of production we have been hounded with falling productivity levels, which has resulted in a country that is mired in debt and aneamic economic growth. Until we make the link between human resources and economic development we will go nowhere. Unless we make this necessary link we will always create short sighted rules that are based more on controlling absolute costs rather than adding greater value to what we have, or don’t have in our case. For example I know someone working in the public sector that needs a tool to perform their job effectively but because of the procurement procedure has been waiting on that necessary tool for weeks, without any consideration that the waiting period is costing much more than the tool they need. And this is just one of many examples.

I have commented on many challenges faced by Jamaica but none is more critical to address than this. The fact is that unless we can change our approach to see the importance of human resources we will still be talking about the same challenges 20 years from now. At the same time people must be held accountable based on performance, and not be assessed based on who they know. If ever we needed a revolution in Jamaica (in both private and public sector) it is the way we approach the hiring and support of human resources. Our disdain for human input, however, is evident in the way we have revered the poor over the years as if it is necessary for them to be with us. So we continue to do everything to keep people poor in the way we have managed this country.

At the end of the day, the major players in the public and private sector must realize that if the people factor is continuously ignored then the organization, and country, will suffer also.

Thursday, November 22, 2007

Last Sunday the Prime Minister once again broached the subject of term limits, giving his reasoning behind the subject. This is that if you can’t demonstrate an ability to fix the country’s challenges within 10 years, then what is the justification for providing another term. This brings to mind the importance of human resources in development of countries and companies.

With the advent of globalization being competitive means relying more on knowledge, and by virtue of that human resources. So even though one puts capital in place, without the proper human resource capability to support efficient utilization of that capital, competitiveness will suffer. It is human thinking that determines how efficiently technology is used, as a computer is one person’s hands can be used more productively than by another person who lacks the appropriate training. So while as a country we have always emphasized capital investment where we have failed is in developing our human resource capability.

International preferenceOur official statistics show that over 70% of our labour force left school without passing even one subject. We also know that our literacy rate is around 80%, while countries we compete with are at 95% and above. So how can we hope to compete with these countries? It is this falling productivity that is at the heart of our problems.

But developing our human resources has never been our emphasis, as we are like rural persons dazzled by the lights of the city, only in our case rural is Jamaica and the city represents other countries. It seems as if once you take a plane from another country and come to Jamaica that you are a greater expert that a resident Jamaican, even if you come from a less developed country. This is a cultural problem with Jamaicans.

We didn’t really start to recognize how powerful Bob Marley was until he died and was honoured internationally. Never mind the fact that for years before his death people from across the world would kill to see him perform, and would visit Jamaica just because of his name. As usual though foreigners always recognize our excellence before we do. His song was even voted best of the century. Leave it to us we would have chosen an international artiste.

There are also many instances where Jamaicans go abroad and do very well. Why is it not possible for them to do well in Jamaica? So whenever we have a project to do, or we are seeking expertise, the first thing we do is seek to get assistance from overseas. Never mind the fact that the overseas persons may not even have more expertise than we do locally, or not even be able to think out a problem better than we do. The fact is that their address does not have Jamaica on it, and they present a brilliant marketing document and speak differently.

I mean it is the US that has had Enron, WorldCom etc. Jamaica has not had that sort of accounting scandal. We have not yet seen any fallout in Jamaica from the sub prime crisis, even though Europe and The US has been affected. These examples should tell us that our Jamaicans may be thinking more about decisions than many others in international companies.

Economic impactEven outside of the cultural issue though there is an economic impact for this type of preference. The fact is that when we continue to favour foreign ideas and tastes over Jamaican ones it causes (i) a much slower development rate, and less emphasis, on our own human capability; (ii) it impacts negatively on our foreign exchange; (iii) it supports the development of foreign firms over local ones; and (iv) it changes the emphasis from local produce to foreign ones.

There is no doubt that cultural tendencies determine consumption patterns, which ultimately affect economics. And this is the part of the problem that has plagued us for years. Can you imagine if the preference was for Jamaican tastes and developing Jamaican talent 40 years ago? We would have been far ahead in terms of our economic development. Driving down Knutsford Boulevard we would be seeing all Jamaican companies that have branches all over the world, instead of seeing the all too familiar foreign companies.

As a country we have produced the best in all categories. We have the best flavours in some of our produce. We have produced one of the leading hotel chains in the world (Sandals), and one thing Butch Stewart always speaks to me about is the excellence of his Jamaican trained hotel workers. We have the world record holder in the 100 metres. The irony is that we have allowed foreigners to have capitalized more on brand Jamaica that we have been able to. A few years ago listening to Jamaican dancehall music would have been seen as not proper, leaving the other countries to exploit the product and recognize our artistes at the Grammy awards, which is when we started to accept it.

We have to start thinking outside of the box, and change our cultural attitudes towards anything Jamaican, including most importantly human resources. I believe that many things we run to foreigners for can be done by Jamaicans. But our tendency is to value foreign input more, and thus pay them more for the same job a Jamaican does. If we do not rate our own then who will.

Other countries that are more developed have done so by focusing more internally than externally. We always, for example, focus on development by exporting, when similarly we could do so by developing locally causing the wealth to remain in Jamaica. Instead we import 80% of inputs and then export the product. This has led to neglecting value-added development of our own crops, for example. A few weeks ago I spoke to a UK trade mission and they were excited about finding opportunities in Jamaica by developing our local products.

I have no problem with foreign investments, which are important for development in a globalized economy, but it is important that we do as other countries, which is to develop local talent and industries.

Thursday, November 15, 2007

The past few weeks have seen oil and commodity prices rising internationally. These incidences, along with the sub-prime crisis, have marked the predicted decline of global growth levels after peaking in 2006. During the times of solid global growth, Jamaica failed to take advantage, instead being satisfied with occasionally achieving 2.5% per annum, averaging less than 1% over the last 18 years.

Contrary to the various commentaries of the need to take advantage of this global growth boom, when even our regional partners were growing in excess of 5% and 6%, the authorities seemed to have been very happy with the accomplishments of 2% per annum. So now the chickens have come home to roost. Everyone knows that economies go through cycles, and not only do you have periods of exceptional growth but there are similarly always periods of depression.

So while other economies have been prepared to deal with the slow times, Jamaica failed to prepare ourselves.

International price increasesWe are now faced with a situation where prices internationally are increasing, our largest trading partner (US) seems to be headed for recession, and global growth is slowing. For a few years I have been saying that Jamaica does not have the capacity to grow above 3%, and the authorities have been content to continue projecting growth levels that we did not have the capacity to achieve.

The current administration has realized that in order to grow the economy at the targeted 6% per annum, there has to be a fundamental shift in our productive arrangements. There has to be significant tax reform, a change in our energy policy, and improved productivity levels among other things. And this change in thinking is to be commended because it is at the heart of our problems.

There are some in the US who have stated that oil prices at US$96 per barrel is not such a big problem as relative prices, when compared to a few years ago, is in fact still lower. The reasoning behind this is that inflation and a higher productivity makes today’s price relatively cheaper. In other words inflation over the years would adjust the constant price down and the fact is that the US is using less oil to produce one dollar of GDP than a few years ago.

In Jamaica’s case, however, although we have had much higher inflation, oil prices are denominated in US$, and so has not been affected by inflation, and our productivity levels have declined by about 0.5% per year. So we are using more oil to produce one dollar of GDP over the similar period.

It is this inability to prepare ourselves for these times by improving productivity and thus creating high growth and increased constant income levels that is causing the heightened panic of high prices today. Even though this period will pass also because the economy has been so unprepared to absorb these shocks, even a temporary bout of instability seems unbearable. So one again there is a call by all, including those that have failed to prepare us, to address a problem that should have been anticipated, based on economic cycles, placing greater pressure on our already scarce resources.

This is the real effect of unproductivity. And unless we can improve our productivity as a country then we will continue to see aneamic growth rates at best, while our trading partners surge ahead. As a country we have been too content to measure growth by how many cell phones, cars and women one has. Not understanding that these can be either trappings of wealth or debt, and for us the latter is the case.

Factors affecting productivityIf we are to affect productivity we must understand what are the factors that cause increased productivity? We must first understand what these are and then seek to ensure that the inhibitions to these are removed. In a knowledge based world, it is important, for example, that we increase our literacy rate from the current 80% level while our trading partners are over 95%. The first thing we need to understand is that productivity is driven primarily by human resources, and this is the main reason why I disagree with the contentment over the years of trying to control expenses by paying relatively low wages in the public sector not recognizing that value added is more important than absolute cost. If we really want to attract the best minds then why do we pay the worst salaries?

What is necessary is not the absolute sums we pay but the ROI on the monies invested in our human resources. What we must do is move towards is an effective performance based pay system. It is such a measurement that will drive productivity, not the traditional book keeper approach of scrutinizing each dollar spent irrespective of return.

There are other factors which affect productivity such as our bureaucracy, lack of proper order, and a general malaise to implementation. We are great at studying and preparing reports, but don’t ask us to implement. After all if we implement we may make an error, so the way not to have any responsibility is not to do anything. So no one ends up doing anything because of the fear of being held responsible for errors that other countries, and companies, would be satisfied with incurring because unless we make mistakes along the way we won’t be able to recognize what does not work. The important thing is to ensure that the proper steps are taken to minimize the risk of failure, but isn’t failure a part of success.

This fear of failure has resulted in the Jamaican economy not being able to transform over the years. So our production frontier remains the same, or in fact has been shrinking over the years. Remaining stagnant is the same as declining. If one examines what we were producing 20 years ago to today we would see that we continue to rely on the same production arrangements even though the world has changed. Even more important we have not even improved the way we produce those same things. This is at the heart of our problems.

Dealing with higher pricesIn relation to the higher prices, the question is how we ease the pain on the poorer people. They continue to be faced with higher prices. Our traditional approach has been to provide direct support through programmes such as PATH and JSIF. But what we need to do is not just provide food stamps, for example, but seek to lessen the effect on prices, as when prices increase it is very hard for them to come back down even when costs reduce. Price increases also cause pressures for wage increases and reduce economic activity. If we recognize that price increases are temporary, because of increases in world oil prices, then the objective should be to control the temporary anomaly, or smooth out the effect just as the BOJ does when it intervenes in the foreign exchange market. A possible solution would be to (after careful projections) provide a temporary subsidy to the retailers on key cost components, not with new funds, but reallocating capital from places such as PATH, thus controlling prices to the final consumer.

In the medium to long term of course we need to develop our own local industries with less dependence on imported supplies.

Wednesday, November 07, 2007

The World Bank and IMF projected that global growth reached a peak in 2006, and from hereon we will start to see lower growth levels. It is still expected that China, India, and Russia will lead the way, having grown 11%, 9%, and 8% respectively in 2006, which accounted for half the world’s growth. Global growth is also burdened by the sub-prime situation in the US, which has already seen write offs around US$30 Billion, and expected to be between US$60 Billion and US$250 Billion. The wide range in the estimated write offs is evidence of the continuing uncertainty, which does more harm than the actual losses itself.

There is no doubt that that global events will affect countries such as Jamaica, as we are seeing with the liquidity crunch and rising oil prices. How much it affects us though will depend on how we approach the management of our internal affairs. Over the past few years the global economy has seen high growth levels, and because of the management of our own affairs we did not manage to benefit from that growth. Similarly, while the global market is going through a challenge, it is still expected that countries will still see strong growth.

Hedging our risksWhat is important is that we recognize the risks to our economy and seek to hedge against any issues that may surface. Jamaica in particular has quite a large exposure to the global situation because we are seen as closely aligned to the US dollar. This of course is because we have 25% of our exports going to North America, 75% of tourists coming from there, and 75% of our external debt is in US dollars. Naturally therefore Jamaica’s main exposure is to the US dollar rather than the Euro and Canadian dollar. In addition, we see where our oil bill is approaching 50% of our total import bill, and oil prices are expected to rise further, at least in the short term.

The confluence of these factors, if left unchecked, has the effect of creating inflationary pressures, among other tings, in Jamaica. And of course given the already low income levels of Jamaicans this will create a further social burden. It is therefore very important that there is a careful examination of what our greatest exposure is and how it will filter into the Jamaican economy, with a view to hedging against these risks.

My own view is that the main problem Jamaica has comes down to the fiscal accounts and the debt. There is no doubt that since the early 1990s we have seen a significant deterioration of both. The problem Jamaica has had over this time is not mainly an economic one but rather an accounting problem. That is we have continually spent more than we earn and therefore have to borrow to support our over expenditure, and no amount of juggling will help if we do not get to the point where we are living within our means.

For the 45 years since independence we have only managed to see a fiscal surplus for approximately 6 of those years. Because of this we have managed to grow our debt from $34 Billion (1990) to close to $1 Trillion today. Over the same period debt/GDP has moved from 90% to the current level of 130%. The only other country with a higher debt/GDP ratio is war-torn Liberia. This trend is unsustainable and certainly the commitment by the JLP to cap the debt/GDP ratio is obviously a welcome sign in a country where unbridled fiscal irresponsibility prevailed.

Forecasting essentialFor years various analysts have been saying that the importance of balancing the fiscal accounts cannot be emphasized enough. Well with the expected slow down in the global economy, and galloping oil prices, once again we will be reacting to a problem rather than forecasting and putting measures in place to address it before it happens. It is always more difficult to react rather than be proactive. In many ways we were still managing the economy as if in the protectionist era of the 1970s and 1980s. Even though we opened up the economy in the 1990s, which in itself was good, we still had a mindset of protectionism and continued to manage our affairs in that way. Hence, while we removed the tariff protection for local companies, we instead subsidized them by providing high interest rates on paper, which many of them invested in rather than face the realities of competition.

In order for us to turn around this economy, especially in light of global challenges, we are going to have to focus on managing down the risks we face. At the heart of it though is the need to move towards a balanced fiscal budget, and then move from there to creating a surplus. This of course means that we have to scrutinize each dollar we spend to ensure that there is a positive return (opportunity benefit).

In many respects we have fallen down on this, as we have not come to grasp with the concept of opportunity cost. We still manage our affairs like old time book keepers, who only focus on the absolute dollar. Such a person faced with a decision to spend $10 or $50 will always spend the $10 because it is less. Never mind the fact that if the $50 is spent you could see a return of additional $50, while the $10 spend may only create $5 in benefit. So this is the way we analyze contracts, and structure our operations. So why should I hire someone and pay them $100 when I can get someone else for $50. Never mind that the $100 person brings more value than the $50 person.

So as we move forward we need a paradigm shift away from the old book keeper mentality. We must start to focus on “value creation” and not just actual expenditure. We need to look at areas where our expenditure will achieve the greatest return after analyzing where our greatest risks are. We then need to identify what the benefits are. For example, if we were to spend the necessary monies to ensure a reliable and efficient public transportation system, then we could save on transportation consumption (30% of total bill). After 45 years of independence it is time that we start thinking outside of the box as what we have been doing for the last 45 years has not worked.

Thursday, November 01, 2007

Jamaica, like Iraq, is under attack from the US. But in our case this is not because the US is dropping bombs on us. In our case the attack is coming from the weakness, and possible recession, of the US economy. Most economic data coming out of the US is shows signs of weakness, and the sub prime mortgage problem may be spilling over into the broader economy. In fact, the worse of this crisis is not upon us, as many financial institutions are yet to write down the related instruments to market value.

Already companies such as Merrill Lynch and Bear Sterns have wrote down US$ billions, and CEOs are taking the rap, and who has not yet stepped down is under pressure. In the case of the giant, Merrill Lynch, the CEO stepped down after writing down some US$8.4 Billion, with another US$4 Billion write off expected.

Spiraling oil pricesAt the same time oil prices topped US$96 per barrel, and at the time of writing is expected to go to US$100 per barrel, and could very well get there by publication. The truth is there is no fundamental basis for a US$100 price, but because of the ongoing tension in the Middle East and lower production out of the Gulf, traders are speculating that supplies will be threatened. And this is going into the US Winter season when demand for oil will increase.

The result is that US consumer confidence and spending have fallen, and the likelihood of a recession next year has increased. In fact some sectors are already deemed to be in a recession. This has resulted in the Federal Reserve (Fed) reducing interest rates within the past six weeks by 75 basis points from 5.75% to 4.50%, which normally would lead to an increase in consumer spending and benefit our 25% of export earnings and 75% tourism earnings that emanate from North America.

This would also have been good news for interest rates also but within the context of investors seeking high quality paper (US Treasuries), the positive impact has been minimal. There is some benefit for us though, as the variable rate instruments will re-price lower, saving us on interest costs, and any new debt instruments we issue can be accommodated at lower rates once we maintain confidence in our fiscal targets especially.

At present fuel consumption levels, in Jamaica, it will also mean that our fuel import bill will increase by approximately US$300 to US$400 Million. No doubt this is the greatest threat that we face to our Balance of Payments (BOP).

The question one would ask then is, doesn’t this mean that Jamaica will suffer under the current global conditions. And the answer is, if we do nothing about it then certainly. However, I believe that we are in a position to determine how much the global conditions impact us and what we need to do is face the challenges and do what is necessary to lessen the impact, or even benefit from the global imbalances.

The greatest threat to Jamaica is not from the global front but comes from within. In other words it is how we manage our affairs, and seek to deal with the challenges, that will determine how we fare. And this has always been the case, as even with recent peaks in global growth we still only managed to eke out less than 2%. In fact, the projections from the World Bank and IMF are that global growth reached a peak in 2006 and is expected to decrease in this and coming years. In short we were unable to take advantage of the peaks in growth, primarily because we lack the capacity to grow beyond a certain level.

Implement not studyWhat we need to do is break the habit of just recognizing problems and talking and studying them to death. As an example the rise in oil prices is upon us, and while US$100 may not be sustainable, oil may not fall below a price in the US$80s per barrel. This is still a big threat to our BOP. But we do have the capacity to change that expected impact, as we presently consume approximately 40% of our fuel in transportation.

This in turn impacts the fiscal accounts, as the bus fares for children and the elderly are subsidized by the government. So it is essential that we do something about this now, which does not need any reduction of subsidies, as we have the ability to deal with it otherwise. My own opinion is that the JUTC can be a catalyst for this change, as if it can be made into an efficient, reliable, and secure transportation system then we can transition to where Jamaicans feel comfortable taking the bus rather than driving everywhere they want to go. This will also ease the traffic congestion, saving not only fuel but the need to repair roads sooner rather than later. In addition, less traffic congestion means more productive time spent at the office rather than on the roads.

The downturn in the US economy also is countered by stronger economies globally, such as China, India, Russia, Canada, Europe etc. The first three accounting for half global growth in 2006 and expected to do so in 2007. Certainly the strategy for Jamaica should be to see how much of our products we can diversify to these growing markets, and how much tourists we can lure from these strong markets. After all their currencies are at highs against the US$, and means stronger spending power. Especially going into the tourism winter season we need to start the wooing of these markets now, which may pay more dividends than focusing on the US market where consumers are careful about how they spend their dollar.

These options can begin to pay dividends within a few months but it is essential that we act now, and set timelines for action plans. We cannot remain in the mode of studying the problem and getting the widest possible consultation. By the time we are finished with all of that we will have suffered the full impact, as global markets today change rapidly and will not await our studies and consultations. We must measure the risks to the country between implementation and research. After all governments are put there to govern in the interest of the people, not consult on everything when it is apparent that the risks of delay are high.

It is within this light that I believe that the move by Audley Shaw to request that the multilaterals reconsider their policy on lending to middle income countries be applauded. Many have questioned how successful this move will be, as the multilaterals have maintained the policy for a while that countries like Jamaica do not qualify for this lower cost funding.

But my own view is that if they say no then we remain in the same position. If on the other hand they say yes then Jamaica could benefit from lower interest costs. In other words the upside is greater than the downside risks, so what is the big deal about the request being made. This as far as I am concerned is not only thinking outside of the box but a plea by the Finance Minister on behalf of all Jamaicans, as our fiscal accounts would be positively affected.